Filing summary
Issuer and period: The supplied filing is Muscle Maker, Inc. and subsidiaries’ Form 10-Q for the quarter ended September 30, 2020, filed November 16, 2020. It is not a filing identified as Sadot Group Inc.; the issuer-name discrepancy should be verified.
Business context and reporting period
Muscle Maker operated a fast-casual restaurant and franchise business focused on healthier, protein-based meals. At September 30, 2020, its system comprised 15 company-owned restaurants and 18 franchised restaurants; three company-owned locations were delivery-only. The unaudited statements compare the three and nine months ended September 30, 2020 with the same periods in 2019.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $1.15 million | $1.11 million | $3.40 million | $3.68 million |
| Operating loss | $0.74 million | $1.40 million | $7.49 million | $2.77 million |
| Net loss | $0.66 million | $2.35 million | $7.66 million | $5.37 million |
| Net loss per share, basic and diluted | $(0.09) | $(1.56) | $(1.06) | $(3.59) |
| Cash used in operating activities | Not separately provided for the quarter | $5.46 million | $3.30 million |
- Q3 revenue increased about 3.5% year over year, while nine-month revenue declined about 7.6%. Company restaurant sales increased; franchise royalties and fees and advertising fund contributions declined.
- Q3 net loss improved by $1.69 million year over year, reflecting lower general and administrative expense and lower interest and debt-discount expense. The nine-month net loss worsened by $2.28 million as operating costs rose substantially.
- Restaurant-level costs pressured performance. For Q3, labor was 47.4% of restaurant sales, rent 20.8%, and other restaurant operating expense 32.3%. For the nine-month period, the respective figures were 48.5%, 16.8%, and 25.8%. The filing attributes higher costs to new or acquired locations, operating inefficiencies, COVID-19 restrictions, and delivery-related expenses.
- Q3 general and administrative expense fell to $457,282 from $1.51 million, largely due to a $1.08 million reversal of stock-based compensation after executives cancelled restricted shares. Nine-month general and administrative expense rose to $6.80 million from $3.58 million, including substantial consultant stock compensation, salaries and bonuses, public-company costs, and offering-related professional fees.
- The company recorded a $100,000 impairment of franchise-agreement intangible assets, citing store acquisitions and closures that reduced expected future cash flows.
- At September 30, cash was $6.06 million, versus $478,854 at December 31, 2019. Working capital was positive $3.06 million, compared with a $3.71 million deficit at year-end 2019. Total assets were $12.12 million; total liabilities were $5.07 million; stockholders’ equity was $7.05 million.
- Cash provided by financing activities was $11.61 million for the nine months, mainly from two public offerings ($11.72 million net) and an $866,300 Paycheck Protection Program (PPP) loan. Investing activities used $559,924, principally for property and equipment.
- Reported debt included $182,458 of convertible notes and $1.12 million of other notes payable at quarter-end. Other notes included the $866,300 PPP loan; its forgiveness application had been submitted, but forgiveness was not assured. The filing reports $486,573 of current and $633,287 of non-current other notes payable.
Material changes, outlook, and risks
- COVID-19: Restrictions led to reduced hours and capacity, delivery-only operations, temporary closures, franchise royalty relief, and deferred executive salaries. The company reported reopening three temporarily closed company locations and permanently closing one; two new university-campus locations were later temporarily closed. Management said the pandemic’s duration and full effects on operations and liquidity were uncertain.
- Going concern: Management and the auditor’s prior-year report raised substantial doubt about the company’s ability to continue as a going concern. Despite positive working capital and increased cash, the company had a $60.75 million accumulated deficit and used $5.46 million in operating cash during the nine months. Management said additional financing may be needed and was not committed; failure to obtain it could require cost cuts, reduced expansion, liability extensions, asset sales, or creditor protection.
- Capital and dilution: February and September 2020 offerings generated $11.72 million net in total. The September offering sold 3,294,118 shares at $1.70; an additional over-allotment generated $764,399 net in October. Shares outstanding were 11,089,440 at September 30 and 11,589,561 as of November 16. Warrants and contemplated equity-plan awards could add dilution.
- Expansion and subsequent events: The company expanded delivery-only operations and reported post-quarter acquisitions of franchisee stores in Chelsea, New York, and Philadelphia. These transactions and related leases and financing occurred after September 30.
- Contingencies: The filing describes pending or accrued legal and vendor matters, including a $100,000 convertible-note balance subject to a prior judgment, contractor and lease disputes, and mechanics liens. It also reports $248,721 accrued for delinquent sales taxes, including penalties and interest.
- Concentration and controls: One supplier represented 85% of purchases in Q3 2020 and 84% for the nine-month period. Management concluded disclosure controls were ineffective due to material weaknesses involving undocumented procedures, limited accounting resources and segregation of duties, communication of transaction information, and IT controls.
- Guidance: The filing provides no quantified revenue, earnings, or cash-flow guidance. Management expects continuing working-capital needs and anticipates pursuing restaurant expansion, subject to available financing and operating conditions.
Important facts for investors to verify
- Confirm that Muscle Maker, Inc. is the intended issuer: the request names Sadot Group Inc., but the filing identifies Muscle Maker, Inc. and ticker GRIL.
- Reconcile nine-month company restaurant sales: the financial statements report $2,785,288, while MD&A gives $2,758,288 in one table and cites a $347,004 increase elsewhere.
- Check the status and eventual forgiveness outcome of the $866,300 PPP loan, as well as the company’s subsequent financing needs and cash burn.
- Assess the effect of COVID-19, restaurant closures, new-store costs, and delivery-channel economics on unit profitability and franchise revenue.
- Review the resolution of the disclosed lawsuits, tax liabilities, and other accrued contingencies, and track remediation of the stated internal-control weaknesses.
- Evaluate potential dilution from outstanding warrants, consultant awards, the 2020 Equity Incentive Plan, and post-quarter share issuance.